Credit Rating

Introduction

The increasing market orientation of the Indian economy, investors value a systematic assessment of risks. To protect small investors, who are the main target for unlisted corporate debt. Credit rating has been mandatory. India was perhaps the first amongst developing countries to set up a credit rating agency in 1988.The function of credit rating was institutionalized when RBI made it mandatory for the issue of Commercial Paper (CP) & subsequently by SEBI. Credit Rating compulsory for certain categories of debentures and debt instruments. In june 1994, RBI made it mandatory for Non-Banking Financial Companies (NBFCs) to be rated. Credit Rating is optional for public sector Undertakings (PSUs) bonds and privately of manufacturing companies also come under the purview of optional credit rating.

Definition

Credit Rating is initially giving an expert opinion by a rating agency on the relative willingness and ability of the debt instrument to meet the debt servicing obligation in time and in full.

Functions of Credit Ratings

Provides information at low cost. Provides easy to understand information. Provides basis for investment. Provides quality and dependable information. Formation of public policy. Provides unbiased opinion. Healthy discipline on corporate borrowers.

Types of Credit Rating

Bond/Debenture Rating Commercial Paper Rating Equity Share Rating Fixed Deposit Rating Borrowers Rating Individual Rating

Credit Rating Process

First Step (Receipt of the request) Second Step

Business Analysis (Assignment to analytical team) Financial Analysis (Obtaining information) Management Evaluation (plant visits & meeting with management.) Competitive Environment (Presentation of findings)

Third Step (Rating committee meeting) Fourth Step (Monitoring for possible change) Fifth Step (Communication of decision or Draft Report) Sixth Step (Dissemination to the public)

Types of Analysis in Credit Rating Process

Business Analysis

Financial Analysis

Industry Risk(quality, structure, d&s, distribution) Marketing Risk(mkt share,selling & distribution,R&d) Operating Efficiency(raw material, cost,labour, tech.) Accounting Quality(profit, stock) Adequacy of Cash Flows Management Evaluation(swot) Earning Protection Liquidity Management Profitability Analysis Asset quality

Fundamental Analysis

Credit Rating Agencies in India

There are four Credit Rating agencies in India CRISIL ICRA CARE and Fitch India

Regulatory Framework
Credit Rating agencies are regulated by SEBI. Registration with SEBI is mandatory for carrying out the rating Business.

Grant of Certificate of Registration

SEBI will grant to eligible applicants a Certificate of Registration on the payment of a fee of Rs 5,00,000 subject to certain conditions.

CRISIL (Credit Rating Information Services of India LTD.)

CRISIL was promoted by Industrial Credit and Investment Corporation of India Ltd. (ICICI) along with (UTI) Unit Trust of India Ltd. As a public limited company with its headquarters at Mumbai. It is the first Credit Rating Agency in India. It was incorporated in 1987. It was the first one to develop the methodology to rate debt instruments in the light of Indias financial, monetary, economic and regulatory environment. CRISIL has rated over 800 debt instruments issued by 580 companies. It has been extended to Debentures, Fixed Deposits & Commercial Papers. CRISIL was the first agency to rate Commercial Paper program in 1989

Services/Functions
To achieve the above objectives CRISIL performs the following functions categorized into three broad service areas: Credit Rating Services Advisory Services Research and Information Services

Credit Rating Services

Credit Rating services include the rating of long, medium and short term credit instrument such as Debentures, Preference shares, Deposits, Certificates of Deposits, Commercial Papers and structured obligations of manufacturing/finance companies, banks, financial institutions, builders, insurance companies in addition to the debt obligations. In addition, CRISIL also assigns rating to the real estate builders/developers, chit funds, bank loan etc.

Advisory Services
CRISIL offers advisory services in the form of consultancy to various state governments in the matters relating to private sector participation in infrastructure development, disinvestment plans, assistance in privatization process. It helps the clients in identifying and reducing risk and formulating strategies and implementing the same.

Research and Information Services

CRISIL undertakes indepth studies in areas like Indian economy, Indian capital markets, Indian industries and Indian corporate sector. Clients include institutional investors, investment bankers, Commercial banks, financial institutions, corporate planners mutual funds and asset management companies.

CRISIL RATING SYMBOLS

Debentures:

High investment Grades

AAA--(High Safety), AA--(High Safety)

Investment Grades
A--(Adequate Safety),

BBB--(Moderate Safety)

Speculative Grades
B--(High Risk), D--(Default)

BB--(Inadequate Safety), C--(Substantial Risk),

Fixed Deposits

FAAA FAA FA FB FC FD

(High Safety) (Adequate Safety) (Adequate Safety) (Inadequate Safety) (High Risk) (Default)

ICRA Ltd.

INVESTMENT INFORMATION AND CREDIT RATING SERVICES (ICRA) has been promoted by Industrial Finance Corporation of India (IFCI) as its main promoter with its head quarters at New Delhi. It is an independent company limited by shares with an authorized share capital of Rs. 10 crores against which Rs. 5 crore is paid up. IFCI holds 26% of the share capital and 74% is contributed by UTI, LIC, GIC, PNB, CBI, Bank of Baroda, UCO Bank, EXIM Bank, HDFC Ltd. And ILFS Ltd. It started operations in 1991.

Range of Services offered

ICRA has diversified the range of its services. It currently provides three types of services namely:

Rating Services Information Services Advisory Services

ICRAs Rating Services

ICRA is the most established Credit Rating Agency in India today. ICRA rates rupee-dominated debt instruments issued by manufacturing companies, public sector undertakings & municipalities among others. The obligations include long term instruments (Bonds & Debentures), medium term instruments (Fixed Deposit Programmes) and short term instruments (Commercial Papers & Certificates of Deposit).

Information Services

The Information Services group focuses on providing authentic date and value added products by Intermediaries, Financial Institutions, Banks, Asset managers, Institutional and Individual Investors and others. Value Added Services Include:- (Equity Grading, Equity Assessment, Corporate Review, Money & Finance, Investment Information Publications, Corporate Reports.)

Advisory Services

ICRA offers wide range of management advisory services includes (Strategic counseling, Risk management, Restructuring solutions, Inputs for formulation)

ICRAs RATING SYMBOLS/GRADES

Long term Instruments, including Debentures/Bonds/Preference Shares

LAAA (Highest Safety), LA+ (Adequate Safety), LBB+ (Risk Prone), LC+ (Substantial Risk),

LAA (High Safety), LBBB+ (Moderate Safety), LB (Risk Prone), LD (Default)

Medium Term Including Certificates of Deposits and Fixed Deposit Programmes

MAAA (Highest Safety), MAA+ (High Safety), MA+ (Adequate Safety), MB+ (Inadequate Safety), MC (Risk Prone), MD (Default)

Short TermIncluding Commercial Papers

A1+ (Highest Safety), A2+ (High Safety), A3+ (Adequate Safety), A4+ (Risk Prone), A5 (Default)

CARE Ltd.

Credit Analysis and Research Equity Ltd (CARE) is a credit rating and information services company promoted by Industrial Development Bank of India (IDBI) jointly with Financial Institutions, Public/Private Sector Banks and Private Finance Companies. The company started is operations in October, 1993 and announced its first rating in 1993. It offers wide range of products and services in the field of Credit Rating and equity research as explained below.

CARE Range of Services

Credit Rating
Information services Equity Research

CAREs SYMBOLS/GRADE

Long-term and mediumterm Instruments

CARE AAA (Best Quality) CARE AA (High Quality) CARE A (Adequate) CARE BBB (Adequate) CARE BB (Inadequate protection) CARE C (High Investment Risk) CARE D (Lowest Category)

Short-term Investments

PR-1 (Very Strong Capacity) PR-2 (Strong Capacity) PR-3 (Adequate Capacity) PR-4 (Minimal degree of safety)

Fitch Ratings India Ltd.

It is the latest entrant in the credit rating Business in the country as a joint venture between the international credit Rating agency Duff and Phelps and JM Financial and Alliance Group. In addition to debt instruments, it also rates companies and countries on request.

Credit Rating world wise

Country Name India Australia Bangladesh Brazil Canada China France Germany U.K. New Zeeland South Africa U.S.A.

Rating BBB AAA BB BBB AAA AA AAA (AA+)* AAA AAA AA BBB+ AA+

Credit Rating in India Company wise

Aditya Birla Retail Ltd. Accer India Pvt. Ltd. Bajaj Auto Finance Ltd. Axis Bank Ltd. Bank of India Bank of Baroda ICICI Prudential Bajaj Allianz SBI Life Ins.

BBB+ AAAA+ AA+ AAA AAA AAA AAA AAA

BIBLOGRAPHY

Books Name Financial Services I.F.S. F.M.O. Web Sites www.slideshare.com www.scibd.com www.google.co.in

Writers Name S.k.Gupta M.L.Singla Pawan Singla